MY BIZ: Reserve Bank tones down inflation rhetoric and cuts SLR

A cautious Reserve Bank of India (RBI) maintained status quo on interest rates in its first monetary policy review under the Narendra Modi government on Tuesday, but promised to decrease them if disinflation becomes faster.

The only relief in the policy announcement was the reduction in the statutory liquidity ratio (SLR) - the portion of deposits banks park in government bonds-by 0.5 per cent to 22.5 per cent, will unlock about Rs 40,000 crore of banking funds.

The SLR cut would come into operation with effect from the fortnight beginning June 14.

RBI governor Raghuram Rajan belied hopes of any reduction in EMIs for home and auto loans by not changing interest rates for the second consecutive time.

But Rajan, who had met both the Prime Minister and Union finance minister Arun Jaitley ahead of the announcement, has brought the monetary policy more in line with the pro-growth stand of the Modi government.

The sheriff of Mint Street has toned down his earlier rhetoric on controlling inflation by hiking the interest rates, which had choked growth.

Rajan's dovish tone on inflation sparked a rally in bonds and raised expectations RBI could even ease monetary policy as early as this year.

The benchmark 10-year bond yield was trading at 8.60 per cent at 3.00 p.m, down 13 basis points from the day's high after earlier hitting a more than four-month low.

The yield had closed at 8.66 per cent on Monday.

The BSE Sensex surged 173.74 points to end at a fresh closing peak of 24,858.59 points. "If the economy stays on this course, further policy tightening will not be warranted," Rajan said in a statement referring to the moderating inflation trend.

He added that the Modi-led victory in elections could help "create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as a gradual recovery of growth".

Jaitley said that RBI has adopted a calibrated approach in its bimonthly monetary policy. "It is a priority for the government to maintain a balance between growth and inflation," he said.